Mortgage rates are reduced

Mortgages rates dropped today, giving homeowners some welcomed relief from the credit crunch. This came as a result of the Bank of England’s decision to reduce its rates from 5% to 4.5%; a decision that they made a full 24 hours ahead of their schedule.

Central banks around the world also followed the Bank of England in a joint effort to avert a bigger global economic crisis. The US Federal Reserve, the equivalent of the American central bank, reduced its base rate from 2% to 1.5 % and the European central bank from 4.25% to 3.75% the central banks of Switzerland, Canada and Sweden all reduced their rates.

The move by the Bank of England will be a source of relief for thousands of United Kingdom homeowners. The benefits are likely to feed through to reduce fixed rates for first time buyers and owners who want to remortgage.

Barclays Bank, the Halifax and Lloyds TSB were also among the first to reduce their SVR lending. Nationwide, HSBC, the Abbey, Standard Chartered and the Royal Bank of Scotland (RBS) are likely to follow their predecessor’s footsteps.

The Bank of England said in a statement that although inflation was expected to rise in the coming months, it would later fall hence easing the global financial crisis and justifying their decision to cut the rate. It also added that conditions in the money markets had deteriorated worryingly and lending for households and businesses is becoming increasingly scarce.

Stephen Gifford, a chief economist at Grant Thornton said, “The same day response from the Bank of England and the Treasury is certainly unprecedented and let’s hope this has the desired impact.”

The rate cut was happily received in the City of London where the FTSE index immediately outran heavy losses to settle up 20.50 points at 4625.81. The city analysts expect the rate to cut further, even potentially to as low as 2.5 percent.

The Bank of England called an urgent meeting of the monetary committee, which is responsible for setting the base rate, after last night’s talks aimed at finalising the bank bail out plan.

The meeting was not to be held until today with the decision being issued tomorrow at midday. Richard Snook, of the Centre for Economics and Business Research said: It had been an unprecedented week and we needed action.”

The Chief International Economist at Capital Economic, Julian Jessop, said about the cut: “It will provide at least a temporary boost to confidence but we fear that there is still a lot more work to do”.

He believes that these changes will be the first in a set, and whether co-ordinated or not rates will ultimately fall to 2.5 percent in the U.K, 2.0 percent in the euro zone, and just 0.5 of a percent in the USA.

Senior city and the business figures were today optimistic that the sheer size of the Government’s rescue package would bring an end to the financial crisis.

Mr David Buik, of BGC partners said: “In the short term this has to be seen as positive because it is calming frayed nerves. But the idea of semi-nationalisation is very regrettable because it means there will be a dilution of equity and lack of control and freedom of movement.”

Although he believes that the Government’s action is a positive step, he said it took too long to come through, and really should have happened at least half a year ago.